Wednesday, May 18, 2022

Russian invasion, crypto trading drive ‘tail risks’ for US banks, says regulator

Michael Hsu, the acting comptroller of the currency, says depending on the outcome of the war in Ukraine, banks could face a number of 'tail risks,' unlikely but extreme risk events.

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A top US banking regulator told banks on Thursday to be more vigilant about guarding against unlikely but extreme risk as Russia’s invasion of Ukraine and the surge in crypto trading has created a range of new of new financial threats.

Michael Hsu, the acting comptroller of the currency, said depending on the outcome of the war in Ukraine, banks could face a number of “tail risks,” unlikely but extreme risk events.

He cited the potential spread of the conflict in Europe, Russian cyber attacks, and further surging inflation as risks banks need to stay on top of with internal scenario testing.

“The elevated tail risk environment today warrants heightened attention,” Hsu told the American Bankers Association Risk conference. “It doesn’t take a lot of mental gymnastics to envision scenarios where multiple tail risks materialise simultaneously or in rapid sequence,” he warned.

Hsu also flagged cryptocurrencies, particularly the use of crypto derivatives, as another area where banks need to be vigilant. As banks become increasingly involved in the space, they must grapple with unreliable price histories, he said.

Hsu also said he was worried that banks may wrongly believe they have hedged the risk of certain crypto positions, when they have not. “History is littered with examples of supposedly hedged positions blowing up,” he said.

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